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In Re Krier, 14-12439 (Bankr. D. Kan. Apr. 29, 2016) Doc. # 74
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANASAS
RONALD L. KRIER
Case No. 14-12439
ORDER DENYING CONFIRMATION
Ronald Krier’s chapter 12 plan treats his domestic court obligation to his
former wife, Constance Schaffer, as an allowed secured claim rather than as a
“domestic support obligation” that must be repaid before his plan can be confirmed.
He offers to repay the debt over 20 years, extending what was originally a fifteen year
obligation in 2005 to one that might not be paid in full until 2036. In a May 2014
settlement agreement, Schaffer agreed to reduce her debt from $106,000 to $88,000
that was payable in full on November 1, 2014. That agreement was a novation that
replaced the parties’ original 2005 property settlement. The 2014 agreement didn’t
delineate between property settlement and maintenance like the 2005 agreement did,
stripping the debt of its domestic support obligation character and excusing Krier
from having to pay it in full as a prerequisite to confirmation.1
1 See 11 U.S.C. § 101(14A); In re Taylor, 737 F.3d 670, 676 (10th Cir. 2013); and In re
Sampson, 997 F.2d 717 (10th Cir. 1993); see also § 1225(a)(7) (Requiring that all domestic
support obligations becoming due and payable after filing be paid in full).
2 Confirmation of debtor’s chapter 12 plan was submitted to the Court on Krier’s and
Schaffer’s joint stipulation of facts and briefs. See Dkt. 65 and supporting exhibits thereto.
The debtor Ronald L. Krier appears by his attorney Dan Forker. Creditor Constance
Schaffer appears by her attorney Kelsey N. Frobisher.
Krier’s obligation to Schaffer under the 2014 agreement is instead a fully
secured claim that may be paid by a stream of payments equal in value to the allowed
amount of the claim. But Schaffer is not a bank. She is a former spouse who has
already waited 11 years to receive payment for her share of the marital estate—an
estate that Krier has continued to use while not paying his obligations to her.
Converting Schaffer’s claim from a single payment obligation due in a few weeks to a
20 year loan lacks good faith under § 1225(a)(3) and falls short of the secured claim
requirements of § 1225(a)(5). Since the plan doesn’t comply with § 1225, confirmation
must be DENIED. The debtor is granted 21 days from the date of this order to file an
amended plan or to convert to chapter 7. Otherwise, the case will be dismissed.2
Constance Schaffer and Ronald Krier separated in 2004 after a 15 year
marriage and were divorced in 2005. In their Property Settlement Agreement (the
“2005 Agreement”), Krier agreed to pay Schaffer $63,750 in property settlement and
the same amount in “spousal maintenance.”3 The property and maintenance
payments were due every February and August in equal amounts and were to be paid
in full within fifteen years, not later than February of 2020. If the debtor missed a
property settlement payment, interest would accrue on any unpaid balance. If
Schaffer married or died during the repayment period, Krier’s obligation to pay the
maintenance portion of the debt would terminate. The agreement recited that none
of the obligations were dischargeable in bankruptcy. The District Court of Osborne
County made this agreement a part of the divorce decree it issued on May 18, 2005.4
3 Dkt. 65-2.
4 Dkt. 65-1.
5 Dkt. 65-4.
Krier missed many payments. In 2013, Schaffer requested and received an
order from the state court determining that Krier was $24,013 behind on
maintenance and $24,013 behind on the property settlement. The parties stipulate
that, before they signed the 2014 Settlement Agreement, Krier owed Schaffer over
In 2010 and 2012, Krier granted his lender, Guaranty State Bank & Trust Co.
mortgages on his farmland. Those mortgages are subordinate in priority to Schaffer’s
judgment lien. When Krier defaulted in 2013, the Bank foreclosed, including Schaffer
and other judgment lien creditors as party defendants.6 That foreclosure led to a
mediated global settlement that is documented by a May 2014 Settlement Agreement
(the “Settlement Agreement”) between Krier and all of his secured creditors.7
6 Dkt. 65-6.
7 Dkt. 65-7. The Settlement Agreement was journalized in the foreclosure case in July of
2014. Dkt. 65-8.
8 Dkt. 65-7, p. 2.
9 Dkt. 65-7, p. 3. Emphasis added.
10 Id., pp. 3-4.
In the Settlement Agreement, the parties “agree and acknowledge” that the
Krier-Schaffer divorce decree “created certain obligations between [them] concerning
payment of spousal support (sometimes referred to as alimony or spousal
maintenance, and payment of monies to equalize a property division.”8 After reciting
the other debts Krier owed the plaintiff and defendants, the Settlement Agreement
The parties agree and acknowledge that they are entering into this
agreement to establish certain amounts to be paid by Krier to all of the
parties, the priority for payment, and to resolve all issues pending
before the parties in all cases set forth above, together with any
other issues not heretofore stated or alleged by the parties.9
The Settlement Agreement then recites that Schaffer will be paid $88,000 and
Krier and Schaffer agree that the above amount differs from the
agreement of the parties concerning payment of monies by Krier to
Schaffer in said divorce action, and that both parties agree to a
modification of said amount, the terms and conditions of payment, and
that upon the payment of $88,000 to Schaffer as set forth above, all
obligations of Krier to Schaffer for payment as previously agreed to by
the parties will be deemed satisfied and paid in full.10
11 Id. at p.7. Emphasis added.
12 Dkt. 65-8.
The parties acknowledged that Schaffer’s judgment lien was senior in priority to the
mortgage and judgment liens of the other creditors. Krier agreed that by November
1, 2014, he would either refinance all of his obligations to Schaffer and the other
lienholders or sell his land and pay all of them in full. The Settlement Agreement
would become part of a journal entry of judgment and if Krier failed to perform, all of
the property he listed as collateral for his various debts would be sold at sheriff’s sale
on November 1, 2014 and the parties paid in priority order.
The Settlement Agreement contained an integration clause:
Absolute, Complete Agreement. This agreement is absolute and
irrevocable. It constitutes the complete and final expression of the
parties’ understandings concerning settlement and dismissal of the
above captioned action [the foreclosure]. This agreement supersedes
all previous contracts, agreements, and understandings of the
parties, whether oral or written. . . . 11
The Settlement Agreement was submitted to the state court for approval along
with a Journal Entry of Judgment that all of the parties approved and that the court
entered on July 18, 2014.12 The Journal Entry finds that the notes of Guaranty Bank
were in default and that, pursuant to the Settlement Agreement, Schaffer was owed
$88,000. The Journal Entry further states that:
Defendants, Constance Shaffer, Midway Co-op, Inc., and MNM Seeds,
LLC all have valid judgments against the Defendant, Ronald L.
Krier, in the amounts and priority referenced above, which
amounts include interest accrued and accruing through November 1,
13 Dkt. 65-8, p. 3, ¶ 4. Emphasis added.
14 See Claim 13-1.
15 Dkt. 19, p. 6. See Till v. SCS Credit Corp., 541 U.S. 465, 479 (2004) (Discount rate for
secured claims in chapter 13 equals prime rate plus a default risk factor).
The Journal Entry barred the plaintiff and the judgment creditors from executing on
those judgments until November 1, 2014 and provided for the plaintiff to arrange for
a sheriff’s sale at execution to be held on November 1, 2014 pursuant to an order of
sale. The recitation in the Settlement Agreement concerning the nature of Krier’s
original obligation to Schaffer is the only reference to any part of the debt having
been for spousal support.
Krier filed this chapter 12 case on October 27, 2014. Schaffer filed a proof of
claim for $88,000 plus interest accruing at 4.75% per annum, describing the debt as
a secured claim for “domestic support obligation/property settlement.”14 Krier’s
chapter 12 plan proposes to pay Schaffer $88,000 in annual payments, amortizing her
$88,000 claim at the trustee’s Till rate of 5.25% per annum over 20 years after
Schaffer objected to the plan on several grounds. She argues first that one-half
of the $88,000 is domestic support that came due on November 1, 2014, post-petition,
and must be paid in full to satisfy § 1225(a)(7). She also argues that the proposed 20
year term, at an interest rate lower than that being paid a subordinate secured
creditor, Guaranty Bank, was not proposed in good faith, barring confirmation under
§ 1225(a)(3). Nor is the proposed repayment sufficient under § 1225(a)(5).16
16 In her brief, Schaffer also argued that Krier’s plan didn’t provide for her to retain her lien
as § 1225(a)(5)(B) requires, but that is incorrect. It does. See Dkt. 19, p.6.
Krier argues that the Settlement Agreement replaced the twin support and
property claims with one debt and that the new debt is no longer a domestic support
obligation that must be paid at confirmation. He argues that he is proceeding in good
faith, that the Till rate is appropriate, and nothing in the Code prevents him from
extending the repayment period for debt secured by a judgment lien for 20 years.
This case has been pending since October 27, 2014. Krier filed his plan on
January 22, 2015. Schaffer’s is the only objection remaining in controversy. At their
request, Krier’s and Schaffer’s counsel submitted stipulations and briefs concerning
Ms. Schaffer’s objections to the plan. Those objections centered on the nature and
treatment of her claim. On August 18, Krier appeared in court and testified in support
of his plan, including its feasibility, but there have been no further proceedings in
this case beyond Krier’s and Schaffer’s briefing of the issues surrounding her claim.
The Settlement Agreement as adopted in the Journal Entry of Judgment
acknowledges that Krier’s original obligations to Schaffer were for spousal
maintenance and property settlement, but goes on to state that the Agreement is
intended to “establish certain amounts” for his debts and to “resolve all issues
pending before the parties in all cases set forth above, together with any other issues
not heretofore stated or alleged ….”17 It also states that Schaffer’s $88,000 claim is a
modification of a prior amount due and that payment of that amount will satisfy all
of Krier’s obligations to her.18 Most notably, the Settlement Agreement states that it
is the final expression of the understandings among the parties that “supersedes all
previous contracts, agreements and understandings….”19 The Journal Entry recites
that Schaffer has a judgment for $88,000 that can be enforced by execution sale if
Krier doesn’t comply with the terms of the Settlement Agreement.20
17 Dkt. 65-7, p. 3, ¶ 5.
18 Id. at ¶ 4.
19 Id. at p. 7, ¶ 2.
20 Dkt. 65-8, p. 4, ¶s 8-9; Dkt. 65-7, p. 6, ¶ 5-6.
21 Dkt. 65-2.
22 Id. at pp. 2-3, ¶s 4-5.
These terms are different from those set out in the 2005 Agreement.21 Then,
Ms. Schaffer’s claim was expressly bifurcated between property settlement and
maintenance.22 Though the payments on each were in equal amounts, the
maintenance payments terminated upon Ms. Schaffer’s death or remarriage and, if
Krier missed any property settlement payments, interest would accrue on the unpaid
principal balance. The final payments were not due until February of 2020. Compare
this to the terms of the Settlement Agreement that combined and discounted the
amount of the support and property debts, eliminated the periodic payment scheme
entirely, omitted any mention of payments being terminated on remarriage or death,
and converted the obligation to a lump sum judgment payable no later than
November 1, 2014.
The Settlement Agreement is a novation that replaced and extinguished the
2005 Agreement. A novation is “a new contractual relation” that is substituted for an
old one, extinguishing the former agreement.23 It replaces the previous agreement in
its entirety rather than modifying only some of the prior agreement’s terms and is
different from an executory accord, an agreement that merely promises a substituted
performance of an existing promise:
23 Elliott v. Whitney, 215 Kan. 256, 259-260, 524 P.2d 699 (1974).
24 Id. at 260.
The distinction between a novation and an executory accord becomes
significant in the event of breach of the new agreement. If the new
agreement constitutes a novation, a breach does not revive the
discharged claim and the parties' rights are controlled by the new
agreement. [citations omitted]
On the other hand the effect of a breach of an executory accord is stated
in the following: ‘Since an accord executory operates at best no more
than as a suspension of the antecedent claim, a material breach of the
accord by the debtor lifts the suspension and makes the creditor’s prior
claim again enforceable.’ [citation omitted].24
An executory accord allows the unmodified terms of the prior agreement to be revived.
A novation doesn’t. Whether the agreement is a novation or an executory accord is a
matter of intent.25 We can infer that the parties intended to replace the former
contract with the latter one when the provisions of the latter contract differ
“radically” from the former.26 So it is here. Not only did the Settlement Agreement
dramatically modify both the payment scheme and the amount due under the 2005
Agreement, it dropped any mention of the debt being support or maintenance, as well
as the termination on remarriage or death terms. Krier agreed to pay his discounted
debt in a few weeks, not years. After they signed it, the Settlement Agreement
replaced the 2005 Agreement between Krier and Schaffer.
Bankruptcy Code §101(14A) defines a “domestic support obligation” (“DSO”) as
a debt that is owed to a former spouse that is “in the nature of alimony, maintenance,
or support,” and has been established by a matrimonial agreement or a court order.
After the recitals, nothing in the Settlement Agreement or Journal Entry suggests
that Mr. Krier’s restated debt to Ms. Schaffer is a DSO. In In re Sampson, the Tenth
Circuit Court of Appeals announced a two-step analysis for bankruptcy courts to use
in determining whether a matrimonial debt is in the nature of support and excepted
from discharge.27 Sampson gives some weight to how the issuing court describes the
obligation, but also applies a series of factors that consider the comparative financial
abilities of the two parties at the time of the divorce, the frequency and regularity of
the periods between payments, the overall length of the payment term, whether the
payments terminate upon a life event like the payee spouse’s remarriage or death or
the emancipation of a child, whether the obligation can be modified, how it is treated
27 11 U.S.C. § 523(a)(5); In re Sampson, 997 F.2d 717, 722-23 (10th Cir. 1993) (dual inquiry
into the parties’ shared intent and the substance of the obligation).
Case 14-12439 Doc# 74 Filed 04/29/16 Page 10 of 14
for tax purposes, and the current circumstances of the parties.28 The Settlement
Agreement doesn’t describe Krier’s obligation to Schaffer as support. Nor are any of
the Sampson considerations addressed. Accordingly, none of Schaffer’s claim under
the Settlement Agreement qualifies as a DSO and Krier need not pay her claim in
full as a prerequisite to confirmation as § 1225(a)(7) would have required.29
28 Sampson, 997 F.2d at 723-26. See also, In re Goin, 808 F.2d 1391, 1392-93 (10th Cir.
29 Though the parties spar over whether the obligations in the 2005 Agreement were DSO,
the old agreement has been extinguished by the Settlement Agreement, mooting that issue.
30 See Flygare v. Boulden, 709 F.2d 1344, 1347-48 (10th Cir. 1982) (adopting eleven non-
exclusive factors enumerated in In re Estus, 695 F.2d 311, 317 (8th Cir. 1982)), superseded
by statue In re Cranmer, 697 F.3d 1314, 1319 n. 5 (10th Cir. 2012) (BAPCPA’s amendment
in § 1325(b) subsumes some of Flygare/Estus “ability to pay” factors and narrows good
faith inquiry; exclusion of social security income from calculation of projected disposable
income calculation cannot constitute lack of good faith where Code expressly allows
exclusion); In re Sorrell, 286 B.R. 798, 805 (Bankr. D. Utah 2002) (applying Flygare factors
to determine whether chapter 12 plan is proposed in good faith, noting that good faith in
chapter 12 is similar to chapter 13 case).
31 Flygare, 709 F. 2d at 1348.
But winning the DSO battle doesn’t win Krier the war because he has not
demonstrated that he proposed Schaffer’s plan treatment in good faith under §
1225(a)(3) or that the treatment complies with the cram-down requirements of §
1225(a)(5). “Good faith” in this context is determined by considering the familiar
“Flygare” factors.30 The relevant factors here are the motivation and sincerity of the
debtor, the timing of his filing, and his effort to repay Ms. Schaffer.31 It is difficult to
draw a positive impression of Krier’s motivation and sincerity when he has been in
payment default to Schaffer since 2005, has made NO payments since 2010, and
when, after he bargained her debt down from $106,000 to $88,000 in May and
promised to pay her in full by November 1, 2014, he instead filed this case on October
27. Adding insult to injury, Krier proposed to pay Schaffer’s discounted claim over a
new 20 year period that will not end until 16 years after the original 2005 obligation
would have been paid in full. And, though Schaffer holds a fully-secured first lien, he
offered her a lower rate of interest than Guaranty Bank will receive.
Ms. Schaffer is not a bank and shouldn’t be treated like one. She is the debtor’s
former wife whose ex-husband kept this land by agreeing to pay her for her share of
it -- and hasn’t. Not only does Krier’s pre-petition conduct reflect poorly on his
motivation and sincerity, but the timing of his filing, the proposed duration of his
payments to Schaffer, and his previous efforts to repay reinforce my concluding that
his treatment of her claim is not proposed in good faith.32
32 See e.g. In re Melcher, 416 B.R. 666, 669 (Bankr. D. Neb. 2009) (extension of alimony and
property settlement judgment by 30 years “unfair and in bad faith”).
Even if Krier has proceeded in good faith, his treatment of Schaffer’s claim
doesn’t comport with § 1225(a)(5). That section requires that Ms. Schaffer have
accepted the plan or that she retain her lien and receive value in an amount not less
than the value of her secured claim. While the plan proposes that Schaffer retain her
lien, it also proposes that she will receive a lower rate of interest than Guaranty Bank
despite her first lien status, and be repaid over the same 20-year term as all of the
other creditors, all commercial entities in the business of extending credit. The debtor
offers no justification for the differential in rates, though I am persuaded that the so-
called Till rate, the prime rate adjusted for risk, is appropriate.33 In any case, the
repayment period is too long. Bloomberg’s Bankruptcy Treatise suggests that—
33 See Till v. SCS Credit Corp., 541 U.S. 465, 479 (2004); see also In re Woods, 465 B.R.
196 (10th Cir. BAP 2012), rev'd on other grounds 743 F.3d 689 (10th Cir. 2014) (Similarity
of chapter 12 to chapter 13 makes Till rate applicable in both).
34 BLOOMBERG LAW: BANKRUPTCY TREATISE, pt. VI, ch. 212, at III.F.4.a. (D. Michael Lynn et
al. eds, 2015), available at www.bloomberglaw.com/content/bankruptcytreatise. See also In
re Torelli, 338 B.R. 390 (Bankr. E.D. Ark. 2006); In re Koch, 131 B.R. 128, 132-33 (Bankr.
N.D. Iowa 1991); In re Lupfer Bros., 120 B.R. 1002, 1005 (Bankr. W.D. Mo. 1990) (citing In
re Peterson, 95 B.R. 663 (Bankr. W.D. Mo. 1988)); and In re Foster, 79 B.R. 906, 911 (Bankr.
D. Mont. 1987).
35 In re Melcher, 416 B.R. 666 (Bankr. D. Neb. 2009); In re Kemp, 134 B.R. 413 (Bankr. E.D.
Cal. 1991) (10-year repayment of former wife not in good faith where debtor could pay
more); and, generally, In re Torelli, 338 B.R. 390 (Bankr. E.D. Ark. 2006) (Reamortization of
prior 10-year bank obligation to 20 years violated present value requirement of §
36 11 U.S.C. § 1225(a)(6).
While there is not a specific provision in the Code that governs the
extent to which the repayment period of a secured claim may be
extended, courts consider the economic life of the collateral, the age of
the debtor, the length of the underlying note, and the creditor's
customary repayment periods for similar loans when deciding whether a
claim's treatment will stretch over too long a period.34
Even though Schaffer’s collateral is real estate that might support extending a
creditor’s repayment term over a period of years, Krier’s underlying obligation to her
was to have been satisfied within a few months, not an additional 20 years. Extending
payment of what was established as a 15 year debt in 2005 out to 2036 is an
inequitable and unsuitable treatment of Schaffer’s claim that I cannot confirm.35
Ms. Schaffer also objects that this plan is unfeasible.36 There is nothing in the
stipulations about that, though Mr. Krier has testified about feasibility in his proffer.
Because I conclude that the plan cannot be confirmed, Ms. Schaffer’s feasibility
objection is moot. If and when Mr. Krier offers an amended plan, I will consider
reopening the record on whether that plan is feasible.
Because the plan’s treatment of Ms. Schaffer’s allowed secured claim was not
proposed in good faith, and because that treatment does not satisfy the cram-down
requirements of § 1225(a)(5) due to the excessively lengthy repayment period,
confirmation is DENIED. If the debtor does not file an amended plan or convert this
case to chapter 7 within 21 days of this order, the case will be DISMISSED without
# # #
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In Re Abengoa Bioenergy Biomass of Kansas LLC, 16-10446 (Bankr. D. Kan. Apr. 25, 2016) Doc. # 69
SIGNED this 25th day of April, 2016.
DESIGNATED FOR ONLINE PUBLICATION ONLY
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
ABENGOA BIOENERGY BIOMASS OF ) Case No. 16-10446
KANASAS, LLC, ) Chapter 11
ORDER DENYING DEBTOR’S MOTION FOR INTER-DISTRICT
TRANSFER UNDER 28 U.S.C. § 1412 AND FED. R. BANKR. P. 1014
Abengoa Bioenergy Biomass of Kansas, LLC moves to transfer this case to the
United States Bankruptcy Court for the District of Delaware where cases involving
its indirect parent companies and other affiliates are pending. This motion requires
me to consider whether that transfer would serve the convenience of the parties or
the interests of justice. After carefully considering both the evidence and argument
Case 16-10446 Doc# 69 Filed 04/25/16 Page 1 of 18
received on April 13 and 19, 2016, I conclude that the facts and unique circumstances
surrounding this debtor and its known creditors do not warrant transferring the case.
Petitioning Creditors and mechanics’ lien claimants Brahma Group, Inc., CRB
Builders, LLC, and Summit Fire Protection Co. commenced this case by filing an
involuntary chapter 7 petition against debtor Abengoa Bioenergy Biomass of Kansas,
LLC (ABBK) on March 23, 2016. Service on ABBK was made on March 25, 2016. On
April 6, ABBK filed a motion to convert the case to chapter 11. An order granting that
motion was entered on April 8. Contemporaneous with the motion to convert, ABBK
filed a motion for inter-district transfer of the case from the District of Kansas to the
District of Delaware, so it can be jointly administered with the chapter 11 cases filed
by ABBK’s affiliates, and requested an expedited hearing on its transfer motion. Also
on April 6, ABBK filed a voluntary chapter 11 petition in the District of Delaware.
Several mechanics’ lien claimants and creditors filed objections to the transfer.1 An
evidentiary hearing was held on the motion on April 13.2
1 See Dkt. 46 (Stoppel Dirt), 47 (Schaedler Enterprises, Inc.), 48 (ICM), 49 (Brahma), 51
(TUSA), 57 (Elliott Electrical Supply).
2 After the evidentiary record was closed on April 13, the Court heard closing arguments from
the parties on April 19. ABBK appeared by its counsel Christine Schlomann. Creditor
Brahma Group appeared by its counsel Rick Griffin and Samantha Woods. Creditor ICMappeared by its counsel Thomas Lasater and Charles Milsap. Creditor Stoppel Dirt, Inc.
appeared by its counsel Bruce J. Woner. Creditor Schaedler Enterprises, Inc. appeared by itsattorney Richard Davis. Creditor Vista Energy, L.P. appeared by its counsel Jeffrey D.
Leonard. Creditor Pioneer Electric Cooperative, Inc. appeared by its attorney Edward J.
Nazar. The United States Trustee appeared by Richard A. Wieland. Victor Zhao, AssistantUnited States Attorney appeared telephonically on behalf of the U.S. Department of Energy.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 2 of 18
In November of 2015, Brahma Group filed a state court mechanic’s lien
foreclosure suit against ABBK in the District Court of Stevens County, Kansas. At
the time this involuntary case was commenced, there were approximately 25 lien
claimants joined in the state court foreclosure action.3 That action was stayed by the
involuntary petition against ABBK.
The Debtor ABBK
ABBK is one of hundreds of affiliates and indirect subsidiaries under the
expansive umbrella of Abengoa, S.A., a Spanish multi-national engineering and clean
technology conglomerate that operates in the energy and environmental sectors,
including the industrial production of biofuels such as ethanol.4 ABBK is a Kansas
limited liability company organized in 2006 and is part of Abengoa’s United States
bioenergy group of subsidiaries and affiliates. Its principal asset is a so-called “second
generation” biofuel/ethanol plant located on 400 acres in Hugoton, Kansas, the
southwest part of the state.5 In addition to the plant, ABBK owns the real estate and
unspecified water rights. After 3 years of construction, the plant was substantially
completed in 2014. The plant started up and achieved commercial production levels
during 2015, but never reached its design capacity of 25 million gallons annually.
Technology and production problems shut production down in November of 2015 and
the plant remains in “idled maintenance” status. ABBK’s witness Christopher
Standlee testified that the plant was “not broken,” but needs modifications or “fixes”
3 See Ex. 3, Third Amended Foreclosure Petition
4 See Ex. G.
5 First generation ethanol plants produce biofuels from food crops like corn while second
generation plants use renewable non-food plant matter like corn stover or switchgrass.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 3 of 18
to run the plant profitably. He anticipated that fixing the problems could cost as much
as $10-$20 million and take between two and six months. ABBK does not have the
cash to fix the plant’s operating problems. While the plant was running, ABBK had
70 to 80 employees; currently only ten remain, including the plant manager Danny
Allison in Hugoton. Mr. Allison reports to Craig Kramer, the Vice-President of
Operations in St. Louis where ABBK’s officers are housed.
ABBK’s Affiliate Relationships
ABBK is wholly owned by Abengoa Bioenergy Hybrid of Kansas, LLC (ABHK),
also a Kansas limited liability company. ABHK, in turn, is owned by Abengoa
Bioenergy US Holding, LLC, (ABUSH) a Missouri limited liability company.6 ABBK’s
mailing address for “official mail” is Chesterfield, Missouri (near St. Louis), the same
address as ABHK’s and ABUSH’s principal place of business.7 The ABBK facility’s
plant manager is in Hugoton, but the ABHK and ABUSH offices and the corporate
officers direct, control and coordinate ABBK from St. Louis.
ABHK filed a voluntary chapter 11 petition in Delaware on April 6.8 ABUSH
filed a voluntary chapter 11 petition in the Eastern District of Missouri (St. Louis) on
February 24 and is the lead debtor in the jointly administered case, together with
other subsidiaries and affiliates in Abengoa’s bioenergy group.9
Both of the Abengoa subsidiaries that supplied engineering and construction
services at the Hugoton project or served as general contractor on the project are
6 Ex. 2.
7 Ex. 8.
8 Ex. 8.
9 Ex. F, p. 29; Ex. 2.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 4 of 18
located in Phoenix, Arizona. They are Abeinsa EPC LLC10 and Abener Teyma
Hugoton General Partnership (Teyma). Both are parties to the Stevens County
foreclosure. Abeinsa EPC and Teyma each filed voluntary chapter 11 petitions in
Delaware on March 29, 2016.11 Neither Abeinsa EPC nor Teyma are part of the
Abengoa bioenergy group.12 Abengoa’s subsidiaries operate on a decentralized
Another Abengoa affiliate, Abengoa Bioenergy New Technologies, LLC (ABNT)
developed and owns the second generation technology in use at the Hugoton plant.
ABNT licenses that technology to ABBK, though there was no evidence offered at the
in Delaware on April 6.14
ABBK’s Books and Records
While operational records are maintained at ABBK’s Hugoton facility, ABBK’s
books and records reside in St. Louis. The construction records for the Hugoton
facility are maintained by Teyma in Phoenix, Arizona.
The Known Creditors of ABBK
ABBK’s known creditors include the U.S. Department of Energy (DOE) which
provides unspecified financial assistance to renewable energy enterprises and the
mechanics’ lien claimants who provided labor and materials in the construction of the
10 “EPC” is the acronym for Engineering, Procurement, and Construction. See Ex. F, p. 5.
Abeinsa EPC is a Delaware limited liability company.
11 Ex. F, p. 28; Ex. 6.
12 Ex. F, p. 5.
13 Ex. F, p. 6.
14 Ex. 7.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 5 of 18
facility.15 I assume there are numerous trade creditors as well as inter-affiliate
obligations. ABBK’s utility provider is Pioneer Electric Cooperative, Inc. and is
located in southwest Kansas.16 Though ABBK suggested at trial that DOE would
assert a priority lien in its assets, DOE’s counsel informed that court that the
Government’s interests are more in the nature of restrictions on ABBK’s use of the
land that are based upon certain regulatory provisions. DOE has no recorded lien, at
least in Stevens County. The mechanics lien claimants are parties to the Stevens
County case and those who have entered appearances in this case. DOE is located in
Washington D.C. The mechanics lien claimants are located in Kansas and several
other states across the country, but all have provided materials and services in the
construction of the ABBK ethanol plant in Kansas.17 The petitioning creditors’
principal places of business are in Salt Lake City, Utah (Brahma); St. Louis, Missouri
(CRB Builders); and St. Paul, Minnesota (Summit Fire). The following mechanic’s
lien claimants are located in Kansas or are entities organized under Kansas law:
ICM, Inc., Stoppel Dirt, Inc., TUSA, Inc., Decker Electric, Inc., Mead O’Brien, Inc.,
Sunrise Staffing Services, LLC, Bearing Headquarters Company, and C.F. Service &
Non-Kansas lien claimants include creditors Acid Piping Technology and
Cogent, Inc., both are located in Missouri. The following lien claimants are located in
15 ABBK has not filed its schedules in either Kansas or Delaware. I assume there are
numerous trade creditors as well as inter-affiliate obligations.
16 ABBK and Pioneer entered into an Agreed Order for adequate assurance of payment under
§ 366 on April 20, 2016. See Dkt. 62.
17 Ex. A and Ex. 3.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 6 of 18
Georgia: Transglobal Energy, Inc., Black Diamond Industrial LLC, Air Techniques,
Inc., and Dustex LLC. Creditor Maine Automation is located in Maine. Vista Energy
is located in Washington. Sulzer Pump Services US Inc. is located in Texas. W-S
Industrial Services, Inc. is located in Iowa. FHI Plant Services is located in Arizona.
Lien claimant Pumping Solutions, Inc. is located in Illinois. We do not know the
principal place of business of either Elliott Electrical Supply, Inc. or Schaedler
Enterprises, two other lien creditors who oppose transfer. Other than these two
creditors, none of the lien claimants appear to maintain a principal place of business
The Parties’ Counsel
Nearly all of the lien claimants have retained counsel for the Stevens County
foreclosure from Kansas or the Kansas City metropolitan area. All of the Abengoa
subsidiaries in the foreclosure – ABBK, Abeinsa EPC LLC and Abener Teyma
Hugoton General Partnership, have retained the services of a Wichita, Kansas law
firm. Ms. Christine L. Schlomann, ABBK’s attorney on the motions filed in this case
offices in Kansas City, Missouri.18 Creditor counsel who have entered their
appearances in this bankruptcy to date are nearly all from Kansas or the Kansas City
area.19 DOE appeared telephonically at the transfer hearing by a justice department
attorney from Washington D.C.
18 After the motion for transfer was heard, Ms. Schlomann moved for co-counsel R. Craig
Martin’s admission pro hac vice which was granted on April 20. Mr. Martin practices with
DLA Piper LLP in Wilmington, Delaware.
19 Counsel Jay Welford of the law firm Jaffe Raitt Heuer & Weiss, P.C. from Southfield,
Michigan has entered an appearance for Varilease Finance, Inc., VFI KR SPE I, LLC and
VFI-SPV VIII Corp.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 7 of 18
ABBK’s sole witness at the transfer hearing was Christopher Standlee, the
Executive Vice-President for Global Affairs. He works for ABUSH, the upstream
parent of ABBK and Eastern District of Missouri debtor, and is a member of its Board
of Directors. He formerly worked out of the St. Louis office but now works from
Washington D.C.20 He is on the Steering Committee for Abengoa’s global
restructuring, but is not the “decision maker” for ABBK and has little or no “line”
authority over its ABBK’s operations.
Apart from the creditors, DOE, and on-site Hugoton plant manager who may
be witnesses in ABBK’s bankruptcy, the identity and location of other potential
witnesses is unknown. The nature and location of the debtor’s other professionals,
such as investment bankers or restructuring experts is not in the record. The DOE
witnesses would likely travel from the Washington D.C. area. It appears that the
officers with authority and management over ABBK’s operations are located at
corporate offices ABHK or ABUSH in St. Louis. No corporate officers appear to be
located in Delaware.
The Eastern District of Missouri Cases
In addition to ABBK’s bankruptcy here, and the recent bankruptcy filings in
Delaware as noted above, several Abengoa affiliates and subsidiaries that, like
ABBK, are part of the bioenergy group, filed chapter 11 cases in St. Louis in the
20 Before working for Abengoa, Mr. Standlee practiced law in Wichita, Kansas, later servingas general counsel to High Plains Corporation before it was acquired by Abengoa.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 8 of 18
Eastern District of Missouri on February 24, 2016.21 The lead debtor in the jointly
administered Missouri bankruptcies is ABUSH – ABBK’s upstream parent. Other
subsidiaries owning or operating first or second generation ethanol plants in
Ravenna, Nebraska; York, Nebraska; Colwich, Kansas; and Portales, New Mexico,
including Abengoa Bioenergy of Nebraska, LLC and Abengoa Bioenergy Company,
LLC, a Kansas limited liability company, are chapter 11 debtors in the Missouri
proceedings. It appears that none of the Abengoa affiliates or subsidiaries that
directly own and operate ethanol plants have filed bankruptcy in Delaware.
Abengoa, S.A.’s Global Restructuring
This bankruptcy and the cascade of affiliate and subsidiary bankruptcy filings
follow the ultimate parent Abengoa, S.A.’s efforts in 2015 to turnaround the
conglomerate’s financial situation.22 In November of 2015 Abengoa, S.A. sought
protection under the Spanish Insolvency Act to pursue negotiations with its principal
financial creditors to reach a global agreement for restructuring its financial affairs.
In March of 2016, Abengoa, S.A. presented its Restructuring Proposal in Spain – “the
framework for the restructuring of Abengoa’s financial obligations,” and is seeking to
obtain the requisite creditor approval in order for the Spanish Court to approve the
same.23 As part of a Standstill Agreement entered into between Abengoa and certain
financial creditors, Abengoa, S.A. and its numerous Spanish affiliates filed chapter
21 Ex. F, p. 29.
22 See Ex. F, Runge Declaration (“Runge Dec.”), pp. 4-14 for history of Abengoa, S.A., its
corporate structure, and business activities leading up to the current global restructuring
and reorganization efforts.
23 See Ex. I, Business Plan & Financial Restructuring Proposal, March 16, 2016; Runge Dec.,
Case 16-10446 Doc# 69 Filed 04/25/16 Page 9 of 18
15 bankruptcy cases in the District of Delaware on March 28, 2016 to extend the
The Abengoa entities and business activities are broken into four “distinct
business units” – bioenergy, EPC (engineering, procurement, and construction),
water, and solar.24 They “operate on a decentralized basis,” and the majority of
operations are in the EPC and solar business units.25 Through the Restructuring
Proposal and its agents, Abengoa has expressed its plans with respect to its U.S.
bioenergy affiliates and subsidiaries. With specific reference to the Missouri
proceedings noted above, it stated that “the Bioenergy Debtors seek to reorganize
through a sale of all or substantially all of their assets or a stand-alone
restructuring.”26 As described in the Restructuring Proposal, the “new” Abengoa in
general would focus on turnkey projects focusing on its engineering and construction
business unit and no longer own “industrial plants.”27 Other publicity in 2016
regarding Abengoa’s future reported that it was open to selling off the bioenergy unit
because “making biofuels” was not part of its core business.28
At about the same time the Restructuring Proposal came out and shortly before
this involuntary was commenced, the plant manager of the Hugoton facility offered
for sale an extensive list of “surplus equipment.”29 Land and water rights have also
24 Runge Dec., ¶ 11.
25 Id. at ¶ 13.
26 Id. at ¶ 33.
27 Ex. I, p. 37.
28 Ex. K. See also, Ex. L.
29 Ex. J.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 10 of 18
been offered for sale. Mr. Standlee testified these were excess rights and land due to
over-purchase of water rights and land that was not needed to run the plant.
The court may, in its discretion, transfer a case either for the convenience of
the parties or in the interests of justice.30 Fed. R. Bankr. P. 1014(b) provides that, if
multiple cases involving the same debtor are filed in different districts, the court in
which the first-filed petition is pending may decide, again based on the interests of
justice or the parties’ convenience, where the case should proceed. Because the first
petition was filed in the District of Kansas, it falls to me to determine where this
chapter 11 case should proceed. Usually, the burden is on the party seeking to
transfer venue to prove that it is warranted by a preponderance of the evidence.31
Courts usually apply the CORCO test, weighing a series of factors set out in
that case.32 Those factors include (1) the proximity of creditors to the court; (2) the
proximity of the debtor; (3) the proximity of necessary witnesses; (4) the location of
the assets; (5) the economic administration of the estate; and (6) necessity for
ancillary administration.33 Many cases suggest that the party seeking to transfer the
case to another venue has the burden to prove either the justice or the convenience of
the contemplated move and at least one judge has noted that the burden of
30 See 28 U.S.C. § 1412(a)(1) and (b).
31 See In re Enron Corp., 317 B.R. 629, 637-39 (Bankr. S.D.N.Y. 2004).
32 See In re Commonwealth Oil Ref. Co., Inc. (“CORCO”), 596 F.2d 1239, 1247 (5th Cir. 1979),
cert. denied, 444 U.S. 1045 (1980).
33 See In re Enron Corp., 274 B.R. 327, 332 (Bankr. S.D.N.Y. 2002).
Case 16-10446 Doc# 69 Filed 04/25/16 Page 11 of 18
determining what is “just” ultimately falls to the judge.34 Courts also give deference
to the debtor’s choice of venue.35 The first case filed was the creditors’ involuntary
petition against a Kansas debtor in Kansas. The debtor converted that case to a
chapter 11 case here, simultaneously filing the companion case in the District of
Delaware. I view the “first-filed” and “debtor preference” rules as part of the “interests
of justice” determination. In weighing the CORCO factors, the court looks at the case
“on the ground” as the record portrays it at the time of the hearing.36 I am also
mindful that transfer should not be granted if it merely shifts the inconvenience from
one party to the other.37
Rule 1014(b) “Convenience” Considerations
The first factor is the proximity of creditors of every kind to the court. Mr.
Standlee testified that this debtor may have “thousands” of creditors in all fifty states.
But ABBK’s order for relief had only issued seven days before the hearing and there
are no schedules. Based on the evidence, the only creditors we know about are the
mechanics lienholders at the Hugoton project, debtor’s utility provider, and the
Department of Energy (DOE or Department). The lien creditors are from various
34 In re Caesars Entertainment Operating Company, Inc., 2015 WL 495259 at *5 (Bankr. D.
Del., Feb. 2, 2015).
35 Caesars Operating at *7 (noting the level of deference given to a debtor’s choice of forum is
less clear where an involuntary petition was filed against the debtor in a different venue prior
to the debtor’s voluntary petition).
36 In re West Coast Interventional Pain Medicine, Inc., 435 B.R. 569, 579-80 (Bankruptcy.
N.D. Ind. 2010) (The court must focus on concrete facts that exist at the time venue motionis considered – not what may or may not play out in administration of the case); CORCO, 596
F.2d at 579-80.
37 In re Great American Resources, Inc., 85 B.R. 444, 446 (Bankr. N.D. Ohio 1988); Matter of
Lakeside Utilities, 18 B.R. 115, 118 (Bankr. D. Neb. 1982).
Case 16-10446 Doc# 69 Filed 04/25/16 Page 12 of 18
places, but more than a few are from Kansas or have consented to its territorial
jurisdiction by doing business in Kansas and by appearing in a Kansas state court
proceeding concerning their claims.
The DOE’s interest is unclear at present. At trial, the debtor said that the DOE
has a lien-like interest in ABBK’s real property by virtue of regulatory provisions that
govern alternative energy grants and that this lien would prime the lien claimants’
priority. Other than Mr. Standlee’s testimony, no evidence of that was produced. At
argument, DOE’s counsel stated that the Department doesn’t claim a lien; rather the
regulations found in 10 C.F.R. § 601.321 gives the Department certain veto rights
over the disposition of an alternative energy grantee’s real estate.38 It remains to be
seen to what extent the DOE’s claim affects the secured status of this asset or how
those rights stack up to against perfected security interests in bankruptcy court. The
creditor proximity test weighs against transfer for now.
The debtor has proximity to the court. ABBK is a Kansas limited liability
company that is owned by another Kansas LLC, ABHK. ABHK is remotely owned by
a Missouri entity, ABUSH. ABUSH’s offices and ABBK’s managing officers are
located in St. Louis, Missouri, and Washington, D.C. Travel between here and those
cities is hardly impossible. Given that this debtor’s assets are few in number (though
very valuable) and that its place in Abengoa’s corporate scheme is as one of many
distinct entities, its need to transport officers and witnesses may prove to be
infrequent and, in any event, will not be burdensome. By comparison, requiring these
38 10 C.F.R. § 601.321.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 13 of 18
creditors to go to East Coast to defend their Kansas law-based claims will
undoubtedly be burdensome to them. This factor weighs against transfer.
As to the proximity of witnesses, the debtor argues that the necessity of
appearance by investment bankers and other professionals who office on the East
Coast demands venue in Delaware. But, some of the likely witnesses to the lien claims
issues are from Kansas or are situated in the Midwest and easily accessible to
Kansas. Many of them are subject to this court’s subpoena power. This factors weighs
slightly against transfer.
This debtor’s assets, including 400 acres of land, water rights, and the plant’s
improvements, are located in Stevens County, Kansas. That is 250 miles from this
courthouse and lies within this court’s territorial jurisdiction. Oversight management
occurs at the “home office” in St. Louis. Mr. Standlee testified he was unaware of
other assets located outside Kansas. This factor weighs against transfer.
The record is less clear concerning the books and records of the debtor. The
plant manager did not testify. Mr. Standlee stated that some of the books and records
are maintained in St. Louis. The construction records for the debtor may be in
Phoenix, and those business records not at the plant are in St. Louis. There is no
suggestion those records reside in the District of Delaware. Given the ability to search
and transmit records electronically, their physical whereabouts may not be as
important as it once was. This factor weighs neutral.
As to the economical administration of this estate, the location of this debtor’s
management in Missouri, while not ideal to the case proceeding in Wichita, should
Case 16-10446 Doc# 69 Filed 04/25/16 Page 14 of 18
not impede efficiently prosecuting the case here. Mr. Standlee came from Washington
to testify on extremely short notice. He is the Executive Vice President for Global
Affairs of ABUSH which is a debtor in the Eastern District of Missouri. He said has
no line authority over this debtor. Rather, he is a member of a steering committee
overseeing all of the bankruptcy cases involving Abengoa entities. The operational
assets are here and St. Louis is not far away. Nothing in the record suggests there
are directly responsible administrators in Delaware. The court notes that it hears
many business cases in which ownership and management are from outside Kansas.
This factor weighs neutral.
In summary, convenience weighs against transferring this case. This is a
debtor with a principal, albeit large and expensive, asset—the Kansas plant.
Purposefully organized as such, it is one of many separate entities that make up a
larger enterprise. Nothing prevents this debtor from benefitting from a debtor in
possession credit facility that is approved in the Delaware cases. This court can
certainly determine whether the amounts requested are appropriate and whether the
extent to which this debtor’s assets will be encumbered is proper. I can reach those
and any other issues concerning the terms of a proposed credit facility as it affects
this debtor very promptly. Right now, there is no evidence about whether such a
facility is forthcoming or who the lenders might be.
Unlike the movants in CORCO, Enron, or Caesars Operating, these objecting
creditors do not seek to transfer a mega-case filing to their venue. Rather, they simply
ask that a case they initiated as an involuntary proceeding and that involves a legally
Case 16-10446 Doc# 69 Filed 04/25/16 Page 15 of 18
and financially distinct entity remain here. At this point, ABBK has simply failed to
show why this case (and this debtor) cannot operate separately, but in tandem with,
the Delaware and Missouri cases.
The Interest of Justice
The interest of justice test involves balancing more intangible considerations.
A court should exercise its power to transfer a bankruptcy case cautiously.39 In doing
so, it should consider what will promote the efficient administration of this estate,
judicial economy, timeliness, and fairness.40
In cases with one or a few assets, courts have favored sending them to or
leaving them in venues where the assets are located. In In re Rehoboth Hospitality,
LP, the court faced a Delaware voluntary petition concerning a debtor who, while
organized in Delaware, owned a hotel in Texas—its only asset.41 In that case, the
court noted that deference is often afforded the debtor’s choice of forum, but that the
debtor’s choice is not dispositive when the choice is not directly related to the
underlying facts and issues in the case.42 There, because the asset and most of its
creditors were situated in Texas, the court granted their motion to transfer after
concluding the movants had carried their burden of proof.
Compare that result to Caesars Operating, where the court recognized that the
level of deference is less clear where an involuntary petition was filed before the
39 CORCO, 596 F.2d 1239, 1241; Enron, 274 B.R. at 342; In re Condor Exploration, LLC, 294
B.R. 370, 377 (Bankr. D. Colo. 2003); In re Toxic Control Tech, Inc., 84 B.R. 140, 143 (Bankr.
N.D. Ind. 1988).
40 Enron, 274 B.R. 327, 343 (Bankr. S.D.N.Y.2002).
41 In re Rehoboth Hospitality, LP, 2011 WL 5024267 (Bankr. D. Del. Oct. 19, 2011).
42 2011 WL 5024267 at *3.
Case 16-10446 Doc# 69 Filed 04/25/16 Page 16 of 18
debtor filed its voluntary case.43 In that case, the Delaware court had the first-filed
involuntary while the voluntary case was filed in the Northern District of Illinois.
The creditors seeking the transfer in Caesars wanted the entire mega-case to be
transferred from that district to the District of Delaware. The petitioning creditors in
that matter filed their petition knowing that the debtor would be filing a voluntary
case. In those circumstances, the court concluded that it would honor the debtor’s
Our situation is different in several ways. First, the petitioning creditors here
sought involuntary relief more than ten days before the voluntary case was filed.
ABBK presented no evidence that the petitioning creditors knew ABBK was going to
file a voluntary chapter 11 in Delaware and that the Kansas involuntary was a
preemptory strike. Second, the ABBK case, while part of a complex set of entities,
does not itself seem to be nearly as complex. It is a company with few but valuable
assets that are encumbered by liens, not unlike the hotel in Rehoboth. Third, the
creditors seeking the transfer in Caesars wanted the entire complex of related cases
to be transferred from the Northern District of Illinois to the District of Delaware.
ABBK’s creditors merely want this entity’s case to be conducted in this District. They
do not seek to wrest the Delaware cases away, nor would this court entertain such a
In considering the fairness of a transfer, I should note the respective parties’
concerns about ABBK’s true intentions in this case. The objecting creditors believe
43 In re Caesars Operating Company, Inc., 2015 WL 495259 at *7 (Bankr. D. Del. 2015).
Case 16-10446 Doc# 69 Filed 04/25/16 Page 17 of 18
that this debtor will ultimately sell the plant because of what they perceive Abengoa’s
larger business strategy to be. Certainly, Abengoa’s senior management has made
clear its intention to exit the manufacturing business and rely more on engineering,
procurement, and construction (“EPC”) both in its overall business plan and in
pleadings in this court. But this court is also open to the possibility that ABBK’s
position as the owner and user of a developing technology furthers the greater
venture’s EPC goals.
It may also be more efficient and less expensive to consider whether and to
what extent to allow the claims in this case here. Like the Delaware cases, this case
is in its infancy; neither court is likely to have “gained familiarity with many of the
issues that have and will continue to arise.”44 The validity of the mechanics lien
claims turns on Kansas law and many of the lien claimants are present in Kansas or
have consented to its jurisdiction. This court has the time and expertise to reach those
and any other necessary issues with dispatch. Even though my distinguished
Delaware colleagues give every issue they get the closest and fairest consideration, I
am reluctant to risk ABBK’s creditors being lost in the sea of complex matters that
may be pending in the larger Abengoa cases.
I conclude that ABBK has not demonstrated by a preponderance of the
evidence that the case should be transferred on either convenience grounds or the
interests of justice. The debtor’s motion to transfer is accordingly DENIED.
# # #
Case 16-10446 Doc# 69 Filed 04/25/16 Page 18 of 18
- Category: Judge Nugent
- Published: 07 April 2016
- Written by Judge Nugent
- Hits: 157
In Re Prucres Inc, 14-10284 (Bankr. D. Kan. Mar. 24, 2016) Doc. # 267
SIGNED this 24th day of March, 2016.
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANSAS
IN RE: )
PRUCRES, INC., ) Case No. 14-10284
) Chapter 11
ORDER DENYING CREDITOR MP PROPERTY PARTNERS – 90 ACRES, LLC’s
MOTION TO DISMISS DEBTOR’S OBJECTION TO
CLAIM NO. 3 (Dkt. 246) and GRANTING DEBTOR’S MOTION
TO ALLOW CLAIM OBJECTION OUT OF TIME (Dkt. 258)
Even when a confirmed plan of reorganization clearly sets a date for claims objections
to be filed, in appropriate circumstances, the Court may entertain a late-filed claim objection
where there has been excusable neglect. To determine whether the late objection is the
product of excusable neglect, courts consider whether the claimant has been prejudiced, how
long the delay lasted, why it occurred, and whether the objector has acted in good faith.
When Prucres filed this case on February 24, 2014, it scheduled MP Property
Partners-90 acres, L.L.C.’s (MP) debt as “disputed.” In its November 2014 plan, Prucres
Case 14-10284 Doc# 267 Filed 03/24/16 Page 1 of 8
claimed it owed MP nothing and telegraphed that it would object to MP’s claim.1 That
objection should’ve been filed on June 30, 2015; instead it was filed 65 days later on
September 3, a significant, but not damaging delay.2 Prucres’ counsel concedes that he did
not calendar the 60-day objection deadline imposed by the plan, but he also says he suffered
a concussion in a car wreck on June 26 and was out of the office for several weeks. Finally,
though this case has had numerous ups and downs, nothing about debtor’s failure to file a
timely motion to extend the claims objection deadline suggests a lack of good faith. Counsel
have been focused on selling the principal asset of the debtor, a process that has proven to be
laborious and contentious. MP and Prucres dispute their respective percentages of interest
in that asset under a Tenancy in Common Agreement. Discovery has closed in this (and the
claims objection) dispute and on February 18, 2016 the matters were set for a May trial. A
final pretrial order is due April 1.
Courts should resolve disputes on the merits when they can. MP has long known that
Prucres disputes its liability on MP’s claim. Very little prejudice attaches to allowing Prucres’
untimely objection to be heard on the merits. MP’s motion to dismiss Prucres’ objection to its
claim is therefore denied and Prucres’ motion to allow claim objection out of time is granted.3
Sometime before Prucres filed this case, MP and Prucres entered into a Tenancy in
Common Agreement under which they acquired a large tract of undeveloped real estate in
Santa Clarita, California. Their respective interests in the land were to be determined by the
provisions of that agreement. MP also loaned Prucres money, secured by a deed of trust on
its tenancy in common interest. When MP’s and Prucres’ principals fell out, litigation ensued
1 Dkt. 115. The plan was confirmed on May 1, 2015. Dkt. 162 (Confirmation Order).
2 Dkt. 207.
3 Debtor appears by its attorney Nicholas R. Grillot. Creditor MP Property Partners – 90
Acres, LLC appears by its attorney J. Michael Morris.
Case 14-10284 Doc# 267 Filed 03/24/16 Page 2 of 8
in California in May of 20134 and, in February of 2014, Prucres filed this chapter 11 case,
scheduling MP‘s claim as unliquidated and disputed.5 On March 20, 2014, MP filed its proof
In November of 2014, Prucres filed its chapter 11 plan.7 In ¶ 3.1 of the plan, it defined
“Allowed Claim” as, among other things, one that has been timely filed and to which no
objection has been filed “on or before the Distribution Date” or before another “applicable
period of limitation fixed by the Bankruptcy Code or by an Order of the Court.” Though
capitalized, the term “Distribution Date” is not defined in the plan. In ¶ 21.1 of the Plan, the
debtor proposed to object to claims within 60 days after the confirmation order. In ¶ 13.3, the
plan provision dealing with MP’s alleged secured claim, Prucres explicitly stated that it owed
MP nothing and that it intended to object to MP’s claim. The confirmation order at ¶ 29
incorporated the plan’s terms and conditions.8
The plan was confirmed on May 1, 2015 and the confirmation order provided that a
motion to sell the Santa Clarita land would be filed within 30 days.9 That motion was filed
on June 25, 2015.10 On June 26, Prucres’ counsel was in a car wreck and sustained a
concussion that sidelined him for several weeks. Before that, however, he had not calendared
the 60-day claim objection deadline. In July, MP’s first lawyer withdrew and Mr. Morris
entered the case on behalf of MP. Prucres filed its objection to MP’s claim on September 3, 65
4 I note that in MP’s state court petition attached to Prucres’ objection, it states a number of
claims, but none based upon the note or deed of trust.
5 Prucres also owns real estate in Wichita, Kansas.
6 Proof of Claim No. 3.
7 Dkt. 115.
8 Dkt. 162.
9 Dkt. 162, p. 11. The parties reserved their rights as to the sale proceeds and to MP’s
disputed secured claim.
10 Dkt. 174. At a hearing on June 18, 2015 on the Debtor’s motion for instructions regarding
the sale and confirmation order (Dkt. 167), the Court ordered that a Motion to Sell be filed
within 7 days.
Case 14-10284 Doc# 267 Filed 03/24/16 Page 3 of 8
days late.11 That same day, Prucres filed a Motion for determination of the parties’ rights to
the Santa Clarita sale proceeds.12 When MP responded on October 7, after receiving an
unopposed extension of time to do so, current counsel raised the missed deadline as a defense
to the claim objection.13 On October 22, I directed the parties to file a Rule 26(f) Report of
Parties Planning Meeting, which they did, and on November 18, I accepted the parties’
proposed scheduling plan. Discovery had already begun and, even though the discovery
deadline has now passed, the parties have agreed to and taken several depositions after its
close. I set these matters for trial in May and await a pretrial order that will come due on
April 1. On February 24, MP filed this Motion to Dismiss Prucres’ objection to its claim.14
After a brief scheduling hearing on March 3, Prucres filed a written response to that motion
as well as its own motion for leave to object to MP’s claim out of time.15 MP replied to those
The current pretrial schedule also controls the parallel dispute between Prucres and
MP about the meaning of the Tenancy in Common Agreement and the extent of debtor’s and
MP’s respective interests in the land and sale proceeds, a matter that must be resolved before
I can authorize a distribution of the Santa Clarita sale proceeds.17 In their pleadings on these
motions, the parties agree that the sale has yet to be closed because, even though there is a
cash buyer under contract, MP wishes to use the proceeds in an I.R.C. § 1031 exchange and
believes it cannot allow the sale to close into escrow without running afoul of tax
11 Dkt. 207.
12 Dkt. 208.
13 Dkt. 221. That same day, MP also responded to Prucres’ related Motion for determination
of rights in the sale proceeds. Dkt. 220
14 Dkt. 246.
15 Dkt. 258 and 259.
16 Dkt. 261 and 262.
17 See Dkt. 208 (Prucres’ motion for determination of parties’ rights and interests) and Dkt.
220 (MP response).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 4 of 8
For the purpose of these motions, I assume without deciding that the 60-day claim
objection deadline provided for in ¶ 21.1 of the Plan binds the debtor and the parties under
11 U.S.C. § 1141(a). However, Fed. R. Bankr. P. 9006(b)(1) provides that the Court may, upon
a showing of excusable neglect, relieve a party from missing certain deadlines that are
specified “by these rules or by a notice given thereunder or by order of court” even when the
movant seeks relief after the deadline has run. Here, the claims objection deadline was
contained in the debtor’s plan. But because the plan’s terms and conditions were incorporated
in the confirmation order, the objection deadline was provided “by . . . an order of the Court.19
I therefore conclude that Rule 9006(b)(1) applies.
In the Pioneer Investment case, the Supreme Court set out a four factor test for courts
to use in determining under Rule 9006(b)(1) whether a party’s “neglect” was excusable.20
Therefore, I consider (1) the danger of prejudice to MP of allowing the objection out of time;
(2) the length of the delay in objecting to the claim; (3) Prucres’ reasons for the delay; and (4)
Prucres’ good faith in requesting additional time. The excusable neglect inquiry is a broad,
equitable one “to balance the interests of the affected parties, guided by the overriding goal
of ensuring the success of the reorganization.”21 The facts set forth above support my
18 26 U.S.C. § 1031 (like-kind exchanges of investment property allow the tax on the gain
from a sale to be deferred, if the sale proceeds are reinvested in similar property).
19 See Dkt. 162, p. 10 ¶ 29. In re Heartland Steel, Inc., 2003 WL 21508233 at *4-*5 (S.D. Ind.
June 26, 2003) (construing whether objection deadline was a matter of contract or court
order; confirmation order gives effect to all plan terms, substantive and procedural, and
thus “prescribes or allows” them and Rule 9006 applies, disagreeing with Ampace), aff’d 389
F.3d 741 (7th Cir. 2004). But see In re Ampace Corp., 279 B.R. 145, 151-52 (Bankr. D. Del.
2002) (mere attachment of chapter 11 plan to confirmation order did not incorporate the
plan by reference into the confirmation order).
20 Pioneer Inv. Serv. Co. v. Brunswick Assocs. Ltd. Partnership, 507 U.S. 380, 395 (1993)
(discussing claims bar date and late-filed claim in chapter 11 case).
21 In re Petroleum Production Management, Inc. 240 B.R. 407, 413 (Bankr. D. Kan. 1999).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 5 of 8
concluding that all four factors are met here.
Long before this chapter 11 case was filed, these parties have been embroiled in
disputes about what Prucres owes MP and their respective interests in the Santa Clarita
land. When this case was filed in February of 2014, the parties were in litigation in California
state court. If MP had any doubt about its claim being in dispute, that doubt should’ve been
resolved when Prucres scheduled its claim as “unliquidated and disputed.” That’s likely why
MP filed a proof of claim.22 MP sought stay relief and, as the parties agreed in an order
resolving it, Prucres filed a plan in November of 2014. In that plan, Prucres stated plainly
that it did not owe MP anything and that it planned to object to MP’s claim.23 MP has long
had reason to be aware of Prucres’ intentions. Though it preserved the timeliness defense in
its October 7, 2015 response to Prucres’ late objection, MP has had every opportunity to
conduct discovery and engage in other pretrial activities. Indeed, MP did not file its motion
to dismiss the claim objection until February 24, 2016, nearly five months after it initially
raised the timeliness issue. There is no hint here that it has been prejudiced or surprised.24
The length of delay—65 days—is long, but is ameliorated by MP’s previous knowledge
of Prucres’ complaints and contentions about its claim and the reasons for the delay. There
are two: a calendar failure and a car wreck. The failure to calendar is inexcusable—debtor’s
counsel practices with a large law firm that boasts decades of expertise and experience in
22 In chapter 11, a claim is “deemed filed” unless it is disputed in the schedules, see 11
U.S.C. § 1111(a) and Fed. R. Bankr. P. 3003(b)(1). If a claim is scheduled as disputed, the
creditor must file a proof of claim, Fed. R. Bankr. P. 3003(c)(2), and if that claim is not
objected to, it is again deemed allowed as filed unless an objection is filed. See 11 U.S.C. §
23 Dkt. 115, Plan, ¶ 13.3. The Plan did not include a detailed description of the merits of
24 See Matter of Southland Corp., 19 F.3d 1084, 1087 (5th Cir. 1994) (debtor’s counsel’s letter
brief on objection to attorney fees claim satisfied writing and filing requirement of Fed. R.
Bankr. P. 3007 and constituted a proper objection; no particular form of objection is
required by Rule 3007); In re 804 Congress, L.L.C., 529 B.R. 213, 221-22 (Bankr. W.D. Tex.
2015) (citing Southland).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 6 of 8
this bankruptcy court. Had the deadline been properly calendared, one of counsel’s many
colleagues at the firm could have filed a timely objection or sought an extension of the
deadline. But I must also consider that debtor’s counsel was out of action for several weeks
due to a concussion received in a serious car accident. During that time, the deadline in
question passed. While it is a close call, I reluctantly conclude that the accident and
concussion are circumstances beyond the debtor’s counsel’s control and that MP has not been
prejudiced by the resulting delay.
Finally, there is no indication that Prucres laid in the weeds and only stated its
objections to MP’s claim at the last moment.25 MP has always known of Prucres’ objection.
MP examined the debtor’s principal as early as July of 2014 and certainly had an opportunity
to explore why the debtor scheduled MP’s claim as disputed. Indeed, MP waited nearly five
months to seek dismissal of Prucres objection to its claim. Meanwhile, discovery proceeded
on both the claim objection and the determination of each party’s interest under the tenancy
in common agreement. Neither party has involved the court in any discovery disputes. The
matter is set for trial in a few weeks and both parties have made it clear that they need a
prompt determination on the claim and the proportionate ownership interests to close the
sale. Granting this relief under Rule 9006(b)(1) furthers the effort to resolve the fundamental
dispute between them on its merits.
For these reasons, I GRANT the debtor’s motion to object to MP’s claim out of time
(Dkt. 258) and DENY MP’s motion to dismiss that claim objection (Dkt. 246). I remind counsel
of the necessity of providing me with a final pretrial order not later than April 1, 2016. In the
25 Cf. In re Hyman Companies, 497 B.R. 465, 471-74 (Bankr. E.D. Pa. 2013) (debtor’s
supplemental objection to claim raised a new basis for objection that was not previously
asserted in its original objection to creditor’s proof of claim and was time-barred by the
claim objection deadline set by debtor in its plan).
Case 14-10284 Doc# 267 Filed 03/24/16 Page 7 of 8
interest of reaching the prompt decision that both parties seek, and to further the closing of
the Santa Clarita sale, neither the pretrial order deadline nor the trial setting will be
continued. Trial counsel shall appear in person at a final pretrial conference at 11:00 on April
21, 2016 in Room 150 and trial remains set for 9:00 a.m., May 4, 2016, in Room 150.
# # #
Case 14-10284 Doc# 267 Filed 03/24/16 Page 8 of 8
- Category: Judge Nugent
- Published: 15 April 2016
- Written by Judge Nugent
- Hits: 136
In Re Ledin, 14-12347 (Bankr. D. Kan. Apr. 1, 2016) Doc. # 111
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANASAS
JONATHAN E. LEDIN
Case No. 14-12347
ORDER DENYING DEBTOR’S MOTION FOR ORDER TO SHOW CAUSE
WHY CREDITOR SHOULD NOT BE HELD IN CONTEMPT FOR
VIOLATION OF DISCHARGE INJUNCTION
A chapter 7 discharge in bankruptcy enjoins creditors from commencing or
continuing to enforce a prepetition debt as a personal obligation of the debtor. This
injunction does not extend to actions to enforce a pre-petition, non-avoided lien. When
a creditor issues an order of garnishment against a judgment debtor’s bank deposits,
the order attaches any credits or other debts owed by the depository bank to the
debtor on the date that order is served. Like any other lien, a garnishment lien that
is not avoided or released “rides through” a chapter 7 bankruptcy case and remains
effective after the debtor’s discharge. While a garnishing creditor would be precluded
from enforcing a garnishment lien after the judgment debtor filed a chapter 7 petition
without relief from the stay, nothing prevents that creditor from attempting to realize
on the garnishment lien after discharge when the stay has expired.
Before this bankruptcy case was filed, FinanceCo garnished Jonathan Ledin’s
account at Commerce Bank and attached $333.49. After he was discharged, Ledin
sued Commerce in state court to obtain a release of the garnished funds. Commerce
filed a third-party interpleader petition, adding both Ledin and FinanceCo as
defendants, and paid the funds into the court’s registry for the court’s determination
of whether Ledin or FinanceCo was entitled to the funds. Instead of participating in
that process, Ledin presented an ex parte order to a Reno County judge to pay out the
funds to him and the judge entered it. After discovering that Ledin obtained the
funds, FinanceCo moved to alter or amend that order asking that the funds be
returned to the court’s registry and that the court determine the parties’ respective
rights in them. Ledin claims that FinanceCo’s effort to set aside the ex parte order is
an attempt to collect a discharged, prepetition debt from him personally and seeks to
have FinanceCo held in contempt. But because FinanceCo’s efforts only extend to
recovering the funds its garnishment lien attached and not to hold Ledin personally
responsible, FinanceCo did not violate the discharge injunction. Even if FinanceCo’s
actions did violate 11 U.S.C. § 524(a), Ledin has received more than the amount
garnished and has been made whole. Ledin’s motion for contempt is therefore
1 I conducted an evidentiary hearing in this matter on March 16, 2016. The debtor, Jonathan Ledin,
appeared pro se. FinanceCo of Kansas, Inc. appeared by its attorney, Samantha M.F. Woods and its
corporate secretary, Dennis Lubbers. These are my findings of fact followed by my conclusions of law
made in this contested matter pursuant to Fed. R. Bankr. P. 7052.
2 Ex. G, p. 45. With interest accruing thereon at the rate of 21% per annum from October 3, 2008, the
judgment had grown to $15,161.63 when FinanceCo garnished Ledin’s bank accounts in September
of 2014. See Ex. G, p. 50.
3 Ledin claimed, as he did here in a later adversary proceeding, that the Social Security Act and
various banking regulations restrict creditors from garnishing and banks from paying out certain
social security payments. See 31 C.F.R. § 212.6(a). The Reno County court rejected that argument in
the June Garnishment case. Ex. G, pp. 47-48.
4 Ex. G, pp. 50-51.
5 Ex. G, p. 53. Commerce was authorized to withhold the $15 administrative fee by KAN. STAT. ANN. §
60-733(a) (2015 Supp.).
6 Ex. G, p. 71.
In July of 2009, creditor FinanceCo of Kansas, Inc. obtained an agreed journal
entry of judgment against Jonathan Ledin in the principal amount of $6,020.43 in
the District Court of Reno County, Kansas.2 In June of 2014, FinanceCo garnished
Ledin’s bank accounts at Commerce Bank in an effort to collect the judgment (the
“June Garnishment”). After Ledin replied to the June Garnishment claiming that the
funds were exempt social security benefits, the Reno County court conducted a
hearing and overruled the objection, ordering Commerce to pay the garnished funds
to FinanceCo.3 On September 5, 2014, FinanceCo served another garnishment order
on Commerce (the “September Garnishment”).4 Commerce answered on September
15, this time stating that it held $333.49 plus an administrative fee of $15.5 On
September 9, Commerce wrote Ledin a letter terminating their banking relationship
and closing his accounts effective October 10.6 Ledin replied to the September
Garnishment, again claiming that the funds on deposit were exempt from
garnishment because they consisted of social security benefits directly deposited to
his account and requesting a hearing that the court set for September 29, 2014.7 At
that hearing, the Reno County court directed the debtor to file bank statements for
July, August, and September of 2014 not later than October 19, presumably so the
court and FinanceCo could review them to determine whether actual social security
funds had been deposited.8 On October 14, 2014, Ledin filed this chapter 7 bankruptcy
case. No further action on the September Garnishment was taken during the
pendency of the bankruptcy until after Ledin received his chapter 7 discharge on
April 14, 2015.
7 See KAN. STAT. ANN. § 60-735 (2015 Supp.).
8 Ex. G, pp. 74-75.
9 Ledin v. FinanceCo of Kansas, Inc., et al. (In re Ledin), Adv. No. 14-5193 (Bankr. D. Kan.).
10 See the order entered in that proceeding for a more detailed description of the litigation waged in
this Court, and, before that, the Reno County District Court. See Adv. No. 14-5193, Dkt. 51.
11 Ex. A. Ledin v. Commerce Bank, Case No. 2015 CV 295 (D. Ct. of Reno County, Kan.).
While in chapter 7, Ledin (a prolific pro se litigant) filed an adversary
proceeding against Commerce, its branch manager, FinanceCo, and its attorney who
handled the garnishments, claiming an “illegal garnishment” and seeking damages
for their impairing his exempt interest in the social security funds and violating
certain federal statutes and regulations in connection with the June and September
Garnishments.9 I dismissed that proceeding for failure to state a claim.10
In September of 2015, after he was discharged, Ledin sued Commerce in Reno
County District Court for return of the garnished funds.11 Commerce answered,
denied liability, and filed a third-party interpleader petition, adding FinanceCo as a
third-party defendant and seeking to pay into court the $348.49 it held, plus Ledin’s
filing fee of $202.80 and service costs, for a total of $566.29.12 On October 30, 2015,
the state court heard and entered an order granting the third-party petition for
interpleader, directing Commerce to pay the funds into the court’s registry, which it
did, and requiring Ledin and FinanceCo to each prosecute their respective claims to
the money.13 On November 3, 2015, without notice to the other parties, Ledin
presented an ex parte order directing the Reno County court’s clerk to pay over the
interpleaded funds of $566.29 to him. Another Reno County judge entered that order
and the clerk paid the funds to Ledin that day.14
12 Ex. B.
13 Ex. E.
14 Ex. F.
15 Ex. G, 26-32.
16 Dkt. 66. Ledin also demanded a jury trial on that motion. Dkt. 91. I denied that demand from the
bench on March 3, 2016, see Dkt. 94, 96. Civil contempt claimants are not entitled to a trial by jury
on either the issue of contempt or compensatory damages. See Federal Trade Commission v.
Kuykendall, 371 F.3d 745, 751-54 (10th Cir. 2004); Reliance Ins. Co. v. Mast Constr. Co., 159 F.3d
1311, 1318 (10th Cir. 1998). See also Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 41 (1989)
(Seventh Amendment protects right to jury trial only if cause of action is legal in nature, as opposed
to equitable); Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir.
1990) (bankruptcy courts are empowered to exercise civil contempt and equitable powers under 11
U.S.C. § 105(a)); Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1306-07 (10th Cir. 2008) (bankruptcy
courts have equitable power under § 105(a) to enforce and remedy violations of the discharge
When FinanceCo learned of the ex parte order, it filed a Motion to Alter and
Amend on November 25, 2015.15 That motion noted that that the earlier order had
been entered without notice to any other parties and requested that the funds be
returned to the court registry so that the court could determine to whom they should
be paid. In response to that motion, Ledin filed his “Motion for an Order to Show
Cause” here, seeking to hold FinanceCo in contempt of his bankruptcy discharge by
filing the reconsideration motion in Reno County.16 On January 6, 2016, the Reno
injunction); Barrientos v. Wells Fargo Bank, N.A., 633 F.3d 1186 (9th Cir. 2011) (Sections 105(a) and
524 do not create a private cause of action for damages for violation of the discharge injunction; the
remedy for discharge injunction violations is an order of contempt). In any event, FinanceCo declined
to consent to a jury trial by a bankruptcy judge, thereby precluding my conducting a jury trial on
Ledin’s contempt proceeding. 28 U.S.C. § 157(e).
17 Ex. H.
18 Ex. J.
County court set the ex parte order aside and directed that a hearing be scheduled to
determine who was entitled to recover the garnished funds.17 The state court did not
direct Ledin to return the funds and he hasn’t. On February 26, FinanceCo orally
moved to dismiss Ledin’s suit with prejudice and to allow him to retain all the
interpleaded funds. The Reno County court entered an agreed order signed by counsel
for FinanceCo and Ledin dismissing the state case on February 26, 2016.18
Ledin claims that FinanceCo’s actions violated the discharge injunction and
caused him both bodily harm and emotional distress. He seeks damages of $150,000.
But, other than stress, loss of sleep, and distraction, Ledin offered no medical
evidence of any specific physical or psychic injury to support either the validity or the
extent of his damage claim at trial. Nor did he offer any evidence of lost interest or
income as a result of FinanceCo’s actions. Ledin called Mr. Dennis Lubbers,
FinanceCo’s corporate secretary, in his case in chief. Mr. Lubbers testified that he
had no knowledge of Ledin’s file and hadn’t been involved in the collection of the
judgment or in instructing FinanceCo’s lawyers as they represented the company’s
Ledin submitted a trial brief.19 I offered FinanceCo an opportunity to file a
responsive brief, but its counsel advised the Clerk that they would stand on the
evidence, their pleadings, and closing argument.
19 Dkt. 105.
20 11 U.S.C. § 524(a).
21 Mountain Am. Credit Union v. Skinner (In re Skinner), 917 F.2d 444, 447 (10th Cir. 1990)
(bankruptcy courts are empowered to exercise civil contempt and equitable powers under 11 U.S.C. §
105(a)); Paul v. Iglehart (In re Paul), 534 F.3d 1303, 1306-07 (10th Cir. 2008) (bankruptcy courts have
equitable power under § 105(a) to enforce and remedy violations of the discharge injunction).
22 KAN. STAT. ANN § 60-732 (2005) and § 60-733 (2015 Supp.). See In re Hilgers, 352 B.R. 298, 309
(Bankr. D. Kan. 2006), aff’d 371 B.R. 465 (10th Cir. B.A.P. 2007), aff’d 279 Fed. Appx. 662 (10th Cir.
May 20, 2008). See also In re Boden, 61 B.R. 329, 331 (Bankr. D. Kan. 1986) (construing predecessor
statute § 60-717 in effect until its repeal in 2002 and replacement with § 60-732(c)).
Ledin claims that FinanceCo’s motion to reconsider the ex parte order violated
his discharge injunction because FinanceCo was continuing to collect a discharged
debt. That is incorrect. Section 524(a)(1) provides that the discharge voids any
judgment as to a personal obligation of the debtor with respect to a discharged debt
and subsection (a)(2) states that the discharge “operates as an injunction against the
commencement or continuation of an action … to collect … any such debt as a
personal liability of the debtor ….”20 Collecting a discharged pre-petition judgment in
personam is barred and doing so would be punishable as civil contempt under 11
U.S.C. § 105(a).21 But, nothing in § 524 precludes a creditor from enforcing a
prepetition garnishment lien that has survived the debtor’s chapter 7 discharge. This
is all FinanceCo sought to do and it is not a violation of the discharge injunction.
Under Kansas law, FinanceCo’s order of garnishment created a lien on the
debtor’s deposits in the hands of Commerce.22 A garnishment order “shall have the
effect of attaching: . . . funds, credits or other indebtedness belonging to or owing the
judgment debtor . . . which is in the possession or under the control of the garnishee,
and all such credits and indebtedness due from the garnishee to the judgment debtor
at the time of service of the order.”23 Thus, when the order of garnishment was served
on Commerce prior to Ledin’s bankruptcy filing, FinanceCo obtained a lien on the
$333.49 that Commerce held on deposit for Ledin.24 Because the Reno County court
did not issue an order directing Commerce to pay the funds to FinanceCo before Ledin
filed his bankruptcy case, their ownership never changed.25 The deposits continued
to be Ledin’s property, though subject to FinanceCo’s garnishment lien.26 When he
filed his bankruptcy petition, those funds became property of the bankruptcy estate
and still remained subject to the lien.27
23 KAN. STAT. ANN § 60-732(c)(1) (2005) (Emphasis added).
24 See Johnson v. Brant, 38 Kan. 754, 17 P. 794 (1988) (when judgment creditor garnishes a bank he
acquires a lien on only such non-exempt property of the judgment debtor as the bank holds when the
garnishment is served); R.T. Davis Mill Co. v. Bangs, 6 Kan. App. 38, 49 P. 628 (1897) (garnishment
attaches a lien on the property of the debtor in the hands of the garnishee from the time of the
service of the same); In re Rodriguez, 140 B.R. 562, 564 (Bankr. D. Kan. 1992) (garnishment lien
attaches at time of service of order of garnishment, regardless of whether garnished funds were ever
paid into registry of court).
25 See In re Thomas, 215 B.R. 873, 875 (Bankr. E.D. Mo 1997) (garnished funds are owned by
judgment debtor until court orders these funds paid over to judgment creditor); In re Bensen, 262
B.R. 371, 380-81 (Bankr. N.D. Tex 2001) (lien against funds in bank account was fixed where writ of
garnishment was served prepetition but garnishment action was not completed prepetition; title to
garnished property did not pass to judgment creditor merely upon service of writ); In re Drum Corps
Ass’n of Spokane, 22 B.R. 929, 933 (Bankr. E.D. Wa. 1982) (where order to pay out garnished funds
was stayed by debtor’s bankruptcy filing, debtor still possessed an interest in the funds and they
became property of the estate).
26 KAN. STAT. ANN § 60-739(b) (2015 Supp.) provides that if an order to pay in is not issued within 60
days of the garnishee’s answer, the garnishee may release the deposits to the judgment debtor.
27 11 U.S.C. § 541(a); In re Johnson, 479 B.R. 159 (Bankr. N.D. Ga 2012) (funds in garnishee's
possession at time of bankruptcy filing are property of the estate; auto stay prevented judgment
creditor from seeking disbursement of any funds held by garnishee, but creditor's lien attaches to
garnished funds upon service of garnishment order and bankruptcy filing does not affect the
judgment creditor's lien).
The trustee did not avoid the garnishment lien during the chapter 7
administration.28 Liens that are not avoided during bankruptcy administration “ride
through” a chapter 7 bankruptcy case and survive the debtor’s discharge.29 Though
FinanceCo was certainly stayed from enforcing that lien during the pendency of the
bankruptcy case by the automatic stay, nothing precluded it from enforcing that lien
post-discharge.30 Section 524(a)(1) enjoins continuing to collect a debt “as a personal
liability of the debtor.” It does not enjoin a creditor from realizing on a prepetition
lien. In In re Johnson, a Georgia bankruptcy court explained that the automatic stay
doesn’t require a garnishing creditor to dismiss its garnishment action or release a
garnishment lien, but that before the creditor takes further action, stay relief would
be required.31 Here, no stay relief is required for FinanceCo to proceed to realize upon
its garnishment lien because there is no longer a stay. It expired upon the entry of
the debtor’s discharge order.32 Accordingly, nothing prevented FinanceCo from filing
its motion to alter and amend the November 2015 court order that set the
interpleaded funds over to Ledin. That motion merely sought to restore the parties to
28 For example, in appropriate circumstances, the trustee could have avoided the lien as a
preferential transfer under 11 U.S.C. § 547(b), or if the garnishment lien encumbered exempt
property, the debtor might have avoided the lien as impairing an exemption under 11 U.S.C. § 522(f).
29 See Johnson v. Home State Bank, 501 U.S. 78, 82-83 (1991) (mortgage survives chapter 7
discharge; only the personal liability of debtor is extinguished by the discharge); Long v. Bullard, 117
U.S. 617, 620-21 (1886); In re Johnson, 479 B.R. 159, 171 (Bankr. N.D. Ga. 2012); In re Willis, 199
B.R. 153, (Bankr. W.D. Ky. 1995) (a lien “rides through” bankruptcy unaffected, unless the lien is
disallowed or avoided).
30 The automatic stay terminates the earlier of the time the case is closed or a discharge is granted or
when property is no longer property of the estate. 11 U.S.C. § 362(c)(1) and (2).
31 479 B.R. 159, 171-72.
32 11 U.S.C. § 362(c)(2)(C).
their previous litigation positions so that the state court could determine whether
FinanceCo or Ledin was entitled to the funds. The discharge doesn’t enjoin that.
In February, 2016, FinanceCo abandoned its efforts to enforce its garnishment
lien and recover the garnished funds and, with the debtor’s approval, the Reno
County case was dismissed with prejudice.33 Ledin remains in possession not only of
the $348.49 garnished from his Commerce accounts, but also his state court case
filing fee and costs that Commerce interpleaded into court. He has been more than
made whole. In a somewhat similar setting, another Kansas bankruptcy judge has
held that once a garnishing creditor released garnished wages to the debtor, that
debtor’s motion to avoid the garnishment lien was moot.34 Even if the facts and law
warranted my finding that FinanceCo had violated the discharge injunction, Ledin
has not demonstrated any compensatory damages that I could award beyond
restoring to him his funds on deposit with Commerce.
33 Ex. J.
34 See In re Rodriguez, 140 B.R. 562, 564 (Bankr. D. Kan. 1992).
While this Court takes discharge violations very seriously, FinanceCo’s effort
to enforce a prepetition garnishment lien in rem is not such a violation. Even if I were
to find FinanceCo in contempt, which I do not, Ledin has been made whole by
recovering and retaining all of the interpleaded funds of $566.29. Lacking any factual
or legal support, Jonathan Ledin’s Motion for Contempt against FinanceCo is
# # #
- Category: Judge Nugent
- Published: 23 March 2016
- Written by Judge Nugent
- Hits: 180
Lusk et al v. Check N Go of Kansas Inc, 14-05004 (Bankr. D. Kan. Mar. 8, 2016) Doc. # 54
DESIGNATED FOR ONLINE PUBLICATION
IN THE UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF KANASAS
RANDY J. LUSK and,
KATHY L. LUSK
Case No. 10-13771
RANDY J. LUSK and
KATHY L. LUSK
CHECK ‘N GO OF KANSAS INC.,
Adv. No. 14-5004
ORDER GRANTING DEFENDANT’S MOTION TO SET ASIDE
DEFAULT JUDGMENT AS VOID
Proper service of process is fundamental to invoking the bankruptcy court’s
personal jurisdiction over a defendant in an adversary proceeding. Ordinarily,
obtaining service is straightforward, at least when counsel and the parties carefully
observe the provisions of Fed. R. Bankr. P. 7004 and Fed. R. Civ. P. 4. Here, they
didn’t. The plaintiffs’ counsel never filed an executed summons and requested a
default judgment based on an unsworn “return of service” nearly six months after the
court issued the summonses. Had plaintiffs filed a properly executed summons
containing a signed declaration of the date and manner of service, service would have
been presumed to be complete when the summons was mailed.1 They didn’t.2 This is
a fundamental procedural error that makes it impossible for the Court to know when
or if the defendant was ever served. Failed service undercuts the Court’s personal
jurisdiction of this defendant, rendering the judgment void. Because proper service
was not accomplished within 120 days of the complaint’s filing,3 this adversary
proceeding must be dismissed unless good cause exists to allow an extension of time
to accomplish proper service.4
1 See Fed. R. Bankr. P. 9006(e); see also In re Wallace, 316 B.R. 743, 747 (10th Cir.
2 See Fed. R. Civ. P. 4(l)(1) which applies in adversary proceedings under Fed. R.
7004(a), requiring an affidavit proving service and Fed. R. Bankr. P. 7004(e) requiring
service be delivered or mailed within 14 (now 7) days after the summons is issued.
3 See Fed. R. Civ. P. 4(m). The former 120 day time limit in Rule 4(m) was reduced to
days by the December 1, 2015 amendments to the Federal Rules of Civil Procedure.
4 Plaintiffs appear by their current counsel William H. Zimmerman, Jr. Defendant Check
Go of Kansas, Inc. appears by its counsel Andrew W. Muller.
Before the Lusks filed their chapter 13 bankruptcy in 2010, they borrowed
$575 from Check ‘N Go of Kansas, Inc. (CNG). They scheduled CNG as an unsecured
creditor, listing its Wichita address on their Schedule F. CNG didn’t file a claim. CNG
says that it sold the Lusk debt to a third party in May of 2010, prior to the Lusks’
bankruptcy. Even so, the Lusks charge that CNG made 13 collection calls to them in
late 2013 and early 2014 and violated the automatic stay. They sued CNG in this
proceeding and sought judgment for $10,000 for each of the 13 post-petition collection
calls they received, $130,000, plus their attorneys’ fees and costs.
After their former counsel Rick E. Hodge, Jr. filed the complaint on January
16, 2014, he requested that two summonses be issued, one directed to CNG in care of
its “directing officer” at its home office address in Cincinnati and the other to The
Corporation Company in Topeka, CNG’s Kansas registered agent.5 Those summonses
were issued on January 23, 2014.6 The summons form the Court uses contains a list
of service methods on the back that includes first class mail for many defendant types
and a special provision for certified mail to insured depositary institutions. Someone
checked the certified mail service box despite the fact that CNG is not an insured
5 Adv. Dkt. 2 and 3.
6 Adv. Dkt. 4 and 5.
7 Adv. Dkt. 2, 3, 4, and 5. The Court checked BankFind, a FDIC website for locating and
verifying insured depository institutions, https://research.fdic.gov/bankfind/ on
2016. CNG did not appear there.
8 Adv. Dkt. 7.
Nothing happened for two months. Then, in March, Hodge filed a motion to
extend time in which to seek the entry of a clerk’s default and a default judgment.8
In that motion, he represented that: “Proper service was effectuated by United States
Certified Mail, Return Receipt Requested, to an officer of Check ‘N Go of Kansas Inc.,
and to its registered agent; a certification with return receipt will be filed with the
Clerk of the Bankruptcy Court within 48 hours of the filing of this Motion.”9 Hodge
submitted an order granting a 30-day extension that the Court signed and entered
on April 17. He has not submitted the certified mail return receipt nor filed the
executed summonses.10 Nor did Hodge pursue default or default judgment during the
9 Adv. Dkt. 7, ¶ 10. Emphasis added.
10 Adv. Dkt. 8.
11 See Adv. Dkt. 13. There is no such animal in federal court; rather, Fed. R. Civ. P.
to proof of service by various means.
12 Adv. Dkt. 14.
13 Adv. Dkt. 14-1. That declaration did not state the manner of service on CNG nor to
at CNG service was directed.
Another six weeks passed and, on May 29, the Court ordered the plaintiffs to
show cause why the case should not be dismissed for lack of prosecution. Then Hodge
filed an unsworn separate document titled “return of service,” on June 3, 2014.11 In
the “return,” Mr. Hodge stated that he served CNG by first class mail on January 23,
2014, by mailing summonses to CNG’s “directing officer” in Cincinnati and to its
registered agent, The Corporation Company in Topeka. He did not file an executed
summons. On June 3, the plaintiffs requested the entry of a clerk’s default.12 Attached
to the June 3 request for default was a document titled “Declaration of Rick E. Hodge,
Jr.” which stated that CNG “was properly served” on January 23, 2014. 13 The motion
for default contained a certificate of service indicating that the motion had been
mailed to CNG, on June 23, 2014, 20 days after the motion and certificate were filed
here.14 Notwithstanding these inconsistencies, on June 10, the Clerk entered a
default.15 That day, the plaintiffs moved for default judgment.16 On June 11, the Court
entered the default judgment (albeit on a document titled “Clerk’s Entry of Default
Judgment”)17 and docketed the Judgment on June 12 as required by Rule 58.18 After
the plaintiffs unsuccessfully attempted to garnish some deposit accounts of CNG in
Ohio and Wichita, the adversary case was closed on October 28, 2014.
14 Adv. Dkt. 14-3. This is obviously incorrect because the purported date of service,
had not yet occurred and because nothing was filed in the Court’s CM/ECF system for
matter on that date.
15 Adv. Dkt. 16.
16 Adv. Dkt. 17.
17 Adv. Dkt. 19. Because the amount of the judgment was a sum certain, the Clerk
entered it under Rule 55(b)(1).
18 Adv. Dkt. 20. Fed. R. Bankr. P. 7058 makes Fed. R. Civ. P. 58 applicable in
19 Adv. Dkt. 36. See Fed. R. Civ. P. 60(b)(1) (granting relief from judgments entered
mistake, inadvertence, surprise, or excusable neglect) and 60(b)(4) (granting relief
judgments). Rule 60(b) applies in all bankruptcy cases and proceedings. Fed. R. Bankr.
Acting through different counsel, the Lusks filed a Notice of Foreign Judgment
in the District Court of Sedgwick County, Kansas. When CNG received notice of that,
it filed a motion to set aside the default judgment on May 7, 2015, claiming that the
judgment had been entered by mistake and that it is void.19 CNG claims that it sold
the Lusk debt before they filed their bankruptcy petition, that it never received a
summons, and that it was never properly served in the adversary proceeding because
the summons was mailed to a “directing officer” rather than a “managing agent.” In
their affidavits, both CNG’s general counsel and an officer of CT Corporation, the
owner of The Corporation Company, deny receiving the summonses and complaint.
Hodge moved to withdraw as counsel and, on June 30, 2015, the Lusks’ current
counsel entered the case. Though the Court urged the parties to stipulate to the
operative facts before briefing this motion, they could not agree.20 Most of the facts
that I have found here come from my review of the docket in this case. After reviewing
the summonses and alleged proofs of service, I conclude that service of process in this
case failed for the reasons below. The Court lacked personal jurisdiction of CNG when
it entered the default judgment. The judgment is void.
20 In lieu of stipulations, CNG submitted Proposed Findings of Fact (supported by
and matters of record) to which the Lusks responded without record support. See Adv.
48 and 52.
21 See Fed. R. Bankr. P. 7004(a)(1).
22 See Fed. R. Bankr. P. 7004(b)(3).
23 See Director’s Procedural Form 2500.
Bankruptcy Rule 7004 and parts of Fed. R. Civ. P. 4 incorporated therein,
govern service of process in an adversary proceeding.21 Rule 7004(b) provides for first
class mail service on various classes of parties including corporations.22 Rule 7004(h)
provides that an insured depositary institution must be served by certified mail.
Civil Rule 4(a) governs the form and content of summonses and the process of
preparing them for issuance by the Clerk. If someone other than a member of the U.S.
Marshals Service serves a summons, Civil Rule 4(l)(1) requires the process server to
prove service by filing an affidavit detailing how it was accomplished. The summons
form that the Clerk’s Office issues contains a “check-the-box” form of declaration
setting out different methods of service, the date of service, and a place for the
to sign under penalty of perjury.23 The process server proves service by completing
and signing the declaration on the summons he mailed to the party served. That copy
is called an “executed summons.” Without an executed summons being filed, the
Court has no way to know how, when, or if service was made.
When this adversary proceeding was filed in early 2014, Bankruptcy Rule
7004(e) required that a summons be served within 14 days of being issued.24 If it could
not be served in that time or there is some error on the summons, the party seeking
service should request an alias summons. If no process was served within 120 days
(now 90 days) after the complaint was filed, Civil Rule 4(m) requires the court to
either dismiss the proceeding without prejudice or, for good cause, set a date certain
by which to complete service. Proper service is “effective to establish” the bankruptcy
court’s personal jurisdiction of the defendant if it is otherwise consistent with the
Constitution and the laws of the United States.25
24 Rule 7004(e)’s 14-day period for mail service after issuance of the summons has
been reduced to its current 7 days. See Norton Bankr. Law and Practice 3d, Norton
Bankruptcy Rules, Rule 7004 Advisory Committee Note (2014) (Thomson Reuters 2015-
25 Fed. R. Bankr. P. 7004(f).
The plaintiffs’ initial counsel somehow failed to observe these rules. To begin
with, CNG is not an insured depositary institution that is entitled to service by
restricted mail. Rather, it could have been served by first class mail like any other
corporation, as Rule 7004(b)(3) provides. Counsel should have mailed the summons
and complaint to the attention of an officer, a managing or general agent, or an agent
authorized or appointed to receive service of process.26 Consequently, checking the
“certified mail” box on the issued summons was the first of a series of missteps here.
26 Some courts required the summons to be directed to the attention of the specifically
officer or agent while others permit service by reference to the office or title held
unnamed person. See In re Villar, 317 B.R. 88, 93 (9th Cir. BAP 2004); In re Outboard
Corp., 359 B.R. 893, 899-900 (Bankr. N.D. Ill. 2007). This Court need not decide
summons directed to the “directing officer” of CNG would have been sufficient, but for
plaintiffs’ failure to prove service, because the summons directed to CNG’s registered
The Corporation Company, complies with Rule 7004(b)(3).
27 See Adv. Dkt. 13 (the “return”) and Adv. Dkt. 14-1 (the declaration).
28 Rule 7004(e) provides that “if a summons is not timely delivered or mailed, another
summons will be issued for service.” If counsel changed the method of service, he
requested alias summonses to replace those originally issued.
29 In re Villar, 317 B.R. 88, 94 (9th Cir. BAP 2004) (Once defendant has established a
facie error in service, the party attempting to effect service bears the burden of
proof); In re
Turkal, 507 B.R. 342, 344 (Bankr. D. Kan. 2014) (plaintiff bears the burden of
personal jurisdiction over defendants and proving the validity of the method of
service); In re
Failing to prove service was the second. Because service is presumed to be
complete upon mailing of the summons, the only way the Court can know if and when
the summons was mailed is by the process server filing the executed summons as
proof of service. Counsel never did. Even if he served CNG by certified mail, he never
filed the “return receipts” necessary to prove that. Third, the unsworn “return of
service” he filed on June 3, 2014 and later reaffirmed with a declaration under
penalty of perjury says that the defendant was served by first class mail, not
mail as the reverse sides of the issued summonses say.27 Fourth, when counsel failed
to prove service within Rule 7004(e)’s 14-day period, he should have requested alias
summonses.28 He didn’t. The Lusks argue that once a summons is mailed, service is
presumed to be complete, but this series of errors more than meets that
presumption.29 Indeed, these circumstances cause me to question whether CNG was
served at all.
Longoria, 400 B.R. 543, 548 (Bankr. W.D. Tex. 2009) (litigant attempting to effect
responsible for proper service and bears the burden of proof).
30 Fed. R. Bankr. P. 9006(e).
31 The obligation to answer the adversary complaint is not triggered until the
“duly served.” See Fed. R. Bankr. P. 7012(a).
32 In re Cossio, 163 B.R. 150, 154 (9th Cir. BAP 1994), aff’d 56 F.3d 70 (9th Cir.
court has no discretion to refuse vacating a void judgment under Rule 60(b)(4)); In re
Turkal, 507 B.R. 342, 344 (Bankr. D. Kan. 2014) (court lacks personal jurisdiction over
party if service of process was insufficient); In re Teligent Inc., 485 B.R. 62, 67-68
S.D. N.Y. 2013) (Rule 60(b)(4) relief is not discretionary and a meritorious defense is
required; a judgment is void if the court lacked jurisdiction of a party due to
service of process).
33 The former 120 day time limit in Rule 4(m) was reduced to 90 days by the December 1,
2015 amendments to the Federal Rules of Civil Procedure.
34 See 4B Charles Alan Wright et al., Federal Practice and Procedure § 1137 (4th ed.
See also Oklahoma ex rel. Board of Regents v. Fellman, 2005 WL 2886236, 153 Fed. Appx.
505 (10th Cir. 2005) (failing to determine whether good cause existed an abuse of
Without an executed summons, I cannot tell when or if the summonses were
mailed.30 Therefore, the answer time provided for in Bankruptcy Rule 7012(a) has
never run.31 While Rule 4(l)(3) states that failure to prove service does not affect
validity and that a court has discretion to allow the proof to be amended, the other
service anomalies mentioned in this order force me to conclude that service here, if it
occurred at all, was not valid. That voids the default judgment for lack of personal
jurisdiction and requires that I set aside the judgment.32
When this proceeding was filed, Civil Rule 4(m) provided that if a defendant
was not served within 120 days of the date the complaint was filed, the Court must
either order the proceeding dismissed without prejudice or extend the time for service
upon a showing of good cause by plaintiffs.33 More than two years have passed since
the filing of the complaint on January 16, 2014. Nevertheless, rather than dismiss
the adversary proceeding, Rule 4(m) grants me the discretion to allow additional time
to serve this defendant for good cause.34 The series of process server errors supply
that cause.35 Therefore, the Lusks will have 14 days from the entry of this order to
serve the summons and complaint on CNG and shall timely file proof of that service.
35 The Court is not without fault in entering the initial judgment and will pay closer
to service details before entering default judgments going forward. Having concluded
proper service was incomplete, I need not reach the merits of CNG’s claim that it never
received service or that it should be relieved of the judgment for the reasons
Fed. R. Civ. P. 60(b)(1) and Fed. R. Bankr. P. 9024.
36 Dkt. 19 and 20.
The fatal defects in the plaintiffs’ purported service of process on CNG require
me to GRANT its motion for relief from the default judgment under Civil Rule
60(b)(4). Because the Court lacked personal jurisdiction of CNG, the default judgment
and Judgment are void and hereby SET ASIDE.36 If the Lusks do not serve CNG and
prove that service by filing an appropriate executed summons within 14 days of the
entry of this order, this adversary proceeding will be dismissed without prejudice.
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